A Guide to Choosing the Right Segments for your Business
By Anne-Marie Watson In my previous article on segmentation, we discussed how markets could be segmented into groups using several different bases as the sorting criteria. These included things such as demographics, psychographics, geographic area, and behavioural criteria. Once the groups have been sorted and you think you have identified what looks like a promising segment or group of segments, then it is time to assess these for their suitability for your business. In choosing a segment, you must really do your homework. You need to look at several factors before assuming the segment is right for your product or service. Some of the things you might assess include: ¨ The dollar size of the segment (Sales Potential) ¨ No. of customers in segment ¨ No. Competitors in segment (degree of fragmentation) ¨ Market demand for the product or service that you are offering ¨ Potential sales of your product or service (Year 1 and outyears) ¨ Type of distribution channels required ¨ Promotional mix needed ¨ Profitability of the segment
The analysis of these factors will tell you some important answers to the following questions: ¨ Will the segment generate enough sales to make the business viable? ¨ Will the segment be profitable? The answers to the following are likely to affect your decision:
o Does the product require distribution in channels that require hefty investment such as a national sales force etc? o Does the promotional mix involve heavy investment because of promotional tactics needed to communicate effectively e.g. TV advertising etc o Does the segment have price sensitivity that would limit the adoption of your product or service? o Does the current number of competitors mean there will be adequate sales potential for your business (is not too fragmented) ¨ Are the prospective customers hard to access? ¨ Are the customers involved in this segment likely to be able to afford to purchase my product or service? ¨ How open will they be to accepting this new product or service
When assessing your situation, you may find that you have only 100 customers in your local area that could be potential customers. If their average purchase will only be $100 a year, then it’s unlikely this will be enough for you to live off, so you may need to extend your segment wider, or go back to reassessing your product offer. If however, those 100 customers could potentially spend $2000 or more per year on your services, then you have some potential for business. In your assessment, if you have potential for more than one segment, then you may want to look at any related segment. It may be more cost-effective to do a multi-segment approach because some of the operational requirements are covered already by establishing in the first segment e.g. the business is already investing in a sales force or establishing distribution channels. If you are just starting up, do the analysis and decide on whether it is viable to really target both segments or to launch into one and then have the second segment as a later objective, after you achieve minimum objectives for the first priority. One big advantage of targeting a specific segment or related segments, is that your promotional costs are likely to be lower, if not, certainly more cost-effective than the other marketing approach taken by some businesses which is to communicate with everyone. The problem with this approach (called mass marketing) is that many dollars will be wasted in the pursuit of speaking to the non-targets who are included. Targeting is not the only way of marketing to your customers but it certainly has many advantages. The most successful small businesses understand that only a limited number of people or businesses will buy their product or service. If the next step to this understanding is then choosing the right segment, then one strategy option is “nicheing”. This refers to the strategy of concentrating on a small, highly specialized market. By focusing on such a small segment, it may be possible to avoid the need for a large sales force or extensive distribution network, and achieve superior profitability. Once the exercise of choosing the segments is made, your next challenge will be how to position your product or service to be maximally appealing to the target audience. This will be the topic of the next article in this series - Part 3: Positioning For Success. © Copyright 2006 – Anne-Marie Watson – Southside Marketing Solutions
Anne-Marie Watson is an experienced marketing consultant, small business owner and Principal of Southside Marketing Solutions. Her company is a specialised marketing consultancy business that provides practical marketing help to small and micro businesses, to help get more clients and increase sales. Anne-Marie can be contacted on Ph: 0432 929 181; email: amwatson@sthside.com.au; or via their website at http://www.sthside.com.au/. |
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